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Friday, July 8, 2016

Oil Price Recovery Brings Drillers Back to High Grade Fields

Shale producers are tapping their crown jewel assets in response to the latest oil price rally, according to Morgan Stanley.

The recovery in crude to close to $50 per barrel has encouraged shale producers to double down on their most profitable fields — a process known in oil country as high grading.

This new trend threatens to force analysts to revisit calls for declining U.S. production, warned Morgan Stanley Commodity Strategist Adam Longson, and thereby constitutes a downside risk for prompt prices.

"The rig count in the highest initial production counties of the Permian Midland continues to march higher and is not far from its 2015 peak," writes a Morgan Stanley team led by Longson. "Since May 6, the Midland has added 13 horizontal rigs in top tier counties versus only eight for the entire play."